Fed: Flat curve and data-dependent rate cuts – BNY

BNY’s John Velis notes that market-implied US policy rates are virtually flat through end-2026, reflecting uncertainty around growth, inflation and the ongoing war. He aligns with Federal Open Market Committee (FOMC) participants who foresee eventual rate cuts if inflation declines and the conflict cools, while acknowledging some policymakers still see a case for potential further hikes if inflation remains above target.

Market pricing and FOMC scenarios

"The market-implied path of policy rates is virtually flat through end-2026 and into early 2027. Given uncertainties surrounding the growth and inflation outlook as the war drags on, current expectations seem reasonable; the duration and impact of the conflict remain impossible to gauge, and the market is probably correct to be similarly agnostic."

"Later, we learn that “many participants” expected rate cuts “if inflation were to decline in line with their expectations.” This is where we sit as well."

"Assuming the conflict ends with even a partial resumption of crude oil supply, the war’s economic damage will weigh on an already weak labor market, leading to rate cuts – as long as oil prices have peaked and are declining – even if crude is unlikely to return to prewar pricing."

"FOMC participants who expect lower rates eventually, like ourselves, are counting on an eventual cooling of the conflict and a related easing of inflationary expectations."

"To be sure, as the same paragraph in the minutes points out, “some participants judged that there was a strong case for a two-sided description of the Committee’s future interest rate decisions in the post-meeting statement, reflecting the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation were to remain at above-target levels.”"

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)